Submission to the Ministry of Business, Innovation and Employment on the Supplementary Financial Markets Conduct 2 July 2015 NEW ZEALAND BANKERS ASSOCIATION Level 15, 80 The Terrace, PO Box 3043, Wellington 6140, New Zealand TELEPHONE +64 4 802 3358 FACSIMILE +64 4 473 1698 EMAIL nzba@nzba.org.nz WEB www.nzba.org.nz
Submission by the New Zealand Bankers Association to the Ministry of Business, Innovation and Employment on the Supplementary Financial Markets Conduct About NZBA 1. NZBA works on behalf of the New Zealand banking industry in conjunction with its member banks. NZBA develops and promotes policy outcomes which contribute to a strong and stable banking system that benefits New Zealanders and the New Zealand economy. 2. The following fifteen registered banks in New Zealand are members of NZBA: Background ANZ Bank New Zealand Limited ASB Bank Limited Bank of China (NZ) Limited Bank of New Zealand Bank of Tokyo-Mitsubishi, UFJ Citibank, N.A. The Co-operative Bank Limited Heartland Bank Limited The Hongkong and Shanghai Banking Corporation Limited JPMorgan Chase Bank, N.A. Kiwibank Limited Rabobank New Zealand Limited SBS Bank TSB Bank Limited Westpac New Zealand Limited. 3. NZBA is grateful for the opportunity to submit on the Supplementary Financial Markets Conduct (the Draft ) in relation to the Financial Markets Conduct 2014 (the 2014 ) made under the Financial Markets Conduct Act 2013 (the Act). 4. The process around the development of the Act and the has been a good example of policy development that has actively involved the industry. NZBA commends the ongoing commitment to meaningful consultation and engagement and appreciates the invitation to participate in this targeted consultation. 5. The following submission makes some brief comments on the Draft. 6. If you would like to discuss any aspect of the submission further, please contact: Kirk Hope Chief Executive 2
04 802 3355 / 027 475 0442 kirk.hope@nzba.org.nz General This submission answers specific questions posed in the consultation paper on the Draft in the Appendix, with particular regard to hybrid and convertible products. We also make some more general comments on aspects of the Act and the 2014 (the regime) that are outside the scope of the consultation but which we consider require further attention. The Draft would be an appropriate vehicle to address these issues. As a general comment, NZBA considers the changes proposed in the Draft to be a helpful and much needed addition to the regime and supports their introduction. DIMS percentage based fees disclosure associated party fees Currently, the 2014 require disclosure and reporting on fees and expenses charged by associated person managed funds (see s 210(4)(b) and (c) and, 211 of the 2014 ), but do not require disclosure and reporting on similar fees and expenses charged by an externally managed fund. This is because fees and expenses charged by externally managed funds do not fall within 37(2) of the 2014 and are not likely to fall into any of the other categories of fees and expenses requiring disclosure under the 2014. This raises the potential for DIMS that invest into one or more associated person managed funds to appear more costly to an investor in comparison to an alternative DIMS service that invests in externally managed funds. The 2014 do not ensure a level playing field among disclosure documents produced by DIMS providers. We believe that the reporting requirements should not be considered in isolation from the corresponding disclosure requirements. The disclosure of fees and expenses charged by an associated person managed funds is likely to be a conflict of interest, which is required to be adequately addressed in the Service Disclosure Statement. There is no need to include this information again in reporting to investors and the s to by an associated person should be deleted from the limb (b)(ii) of the definitions of other charges and percentage based charges in clause 37(2) of Schedule 21 of the 2014. To enable customers to make better-informed decisions about the total cost of using any DIMS service, NZBA submits that the disclosure in the Investment Proposal of the components that make up the total cost of investing and using the service (including the total cost), is desired and more helpful to the customer. We have illustrated this concept as follows: 3
This approach provides transparency of total cost of using any DIMS service. It enables the customer and the industry the ability to make a standardised total cost comparison between competitor services. Alternatively, if this proposed approach is not accepted, an alternative means of ensuring a level playing field among DIMS providers would be to amend the disclosure and reporting requirements so that percentage-based charges relating to externally managed funds are required to be disclosed and reported. This alternative approach would mean that DIMS providers that use associated person managed funds and DIMS providers that use externally managed funds disclose and report information to investors on a comparable basis. We would also note the same with respect to trading expenses that benefit an associated person. In order to ensure fair comparison, these should be similarly represented, that is either consistently included or consistently excluded, irrespective of whether the provider is an associated person or not. Derivatives and currency forwards NZBA submits that the wording of the type of currency forward prescribed for the purposes of clause 21(d) of the Schedule 1 to the Act (and exempt from Part 3 disclosure) needs to be amended to reflect how the system creates '12 month' or '1 year' derivatives so that banks do not have to make system changes to amend these derivatives in order to rely on the exemption (and not do disclosure). Clause 44(2) of Schedule 8 to the 2014 prescribes the type of currency forward as one for which settlement is at a time no later than 12 months after the time the currency forward is entered into. NZBA considers that currency forwards are essentially a relatively basic, fundamental foreign exchange product widely used, and having minimal complexity and risk. Accordingly, some standard market conventions and practices for dealing in these products have developed over time, including the most common periods for which currency forwards are entered into (typically being 12 months or 1 year). All currency forwards are priced using a 'spot price' which is a price for settlement 2-3 days later, depending on the relevant currencies. Accordingly, in the market, the to '12 month' or '1 year' currency forward means a currency forward where the period of the forward is 12 months or 1 year starting from a date up to 3 days after the spot transaction is settled. Effectively, the currency forward is 'entered into' a few days prior to the commencement of the 12 month/1 year period of the forward. This occurs particularly where an electronic mechanism to price or 4
enter into the currency forward is used. The settlement lag stemming from the spot price settlement is built into the software of the system. While it is possible for the settlement date to be set at a date in the system that is 12 months from the date the spot price is obtained (and not from settlement of the spot price) this would be considered a non-standard period. The issue could be addressed by clause 44(2) of the prescribing a currency forward as one for which settlement is at a time no later than 12 months and one week after the currency forward is entered into. This will account for market convention and common practice so that the exclusion from disclosure for 12 month/1 year currency forwards can be relied on. Period of currency forward needs to account for non-business days We also note that the period drafted in clause 44(2) of Schedule 8 of the does not recognise the extension of settlement past the originally agreed settlement date where the original settlement date does not fall on a business day. This issue is recognised specifically in Regulation 13 in relation to the time prescribed for section 8(4)(a)(ii) of the Act. This recognition is equally relevant to the time period of prescribed currency forwards. We therefore submit that clause 44(2) of Schedule 8 of the is amended so that the treatment is consistent with Regulation 13 and the period recognises later settlement due to non-business days. Vanilla debt As NZBA and some of our member banks have raised with MBIE previously, we submit that less complex debt products issued by registered banks (commonly known as vanilla debt ) should be exempted from the requirement to prepare and lodge a Limited Disclosure Document (LDD) under clause 23(2) of Schedule 8 of the 2014. Subclause (2) should be expanded to include category 2 products and other less complex debt products using the taxonomy described below. Currently debt securities issued by a registered bank are exempt from the requirement to prepare a Product Disclosure Statement (PDS) for debt securities imposed by the Financial Markets Conduct Act (Act) due to clause 21(b), Schedule 1 of the Act. However if the debt security issued by a registered bank is not also a category 2 product - banks are required to prepare an LDD for these debt securities as these securities are called in under clause 23, Schedule 8 of the 2014 and subject to the LDD by virtue of clauses 24-26, 37-43 of Schedule 8 and Schedule 9 of the 2014 and clause 26 of Schedule 1 of Act. NZBA submits it is unnecessary to apply the LDD regime to vanilla debt products and that these products should be treated in the same manner as category 2 debt securities (and subject to a full exemption from disclosure requirements) because the complexity of, and risks associated with, vanilla debt products is no greater than that of a category 2 debt security. Registered banks refer to vanilla debt products as those debt securities commonly known in the market by names like Medium Term Note (MTNs) or Registered Certificates of Deposit 5
(RCDs). From a bank perspective these can also include simple debt products that combine elements of category 2 products such as call debt securities and term deposits (eg tiered interest/fee deposit accounts). We consider vanilla debt products distinct from more complex debt products that are commonly known in the market by names like Covered Bonds or Capital Notes and that typically have features like subordination and conversion. Banks consider these more complex debt products are appropriately subject to the LDD regime as the complexities and risks associated with them need to be explained clearly to investors. However, NZBA submits that for vanilla debt products, as for category 2 products under the current exemption in clause 21(a), Schedule 1 of the Act, the issuer should be free to determine what the most appropriate disclosure for investors is. These issuer determined disclosures will still be subject to the fair dealing obligations in Part 2 of the Act. NZBA submits that the following features identify a product as vanilla debt : not subordinated not convertible fixed maturity date no more than 7 years after issue fixed repayment amount no ability for the way in which interest is calculated to be changed no ability to defer interest payments denominated in NZ dollars The features can be used to create a taxonomy that excludes such products from the operation of clause 23, Schedule 8 of the 2014, which subjects all non-category 2 debt securities issued by a registered bank to the LDD regime. Risk Indicators In our view, the inclusion of a risk indicator in a PDS blurs the distinction between that document and a fund update, and undermines the original intent that the PDS contain static, seldom changing information while the fund update contain the information that does change. A fund update should be a flexible reporting instrument and its primary purpose should be to update existing investors. It should not become a quasi-pds for new investors, subject to the same consent procedures and liability provisions as the PDS. We submit that the risk indicators should be contained in the fund updates and should not be included in the PDS. 6
Appendix Section one: feedback on technical issues with the s Exposure draft Definition changes Reg 4 Reg 5, def of convertible The definition here follows the language used in section 44 of the Act. However, this definition should also specifically include financial products that are exchanged for another financial product. This would be consistent with: - proposed new 49A(b)(ii), which contemplates the "new product" being issued by a different issuer to the issuer of the convertible; - the proposed definition of "bank hybrid products" to be inserted in Schedule 9 of the ; and - the treatment of bank hybrid products as "convertibles" in a number of places in Schedule 9. This could be achieved by amending the proposed definition of "convertible" as follows: "convertible means a financial product that will be converted into or exchanged for, or is or may become convertible into or exchangeable for, into another financial product (the new product)" Reg 5, def of retail investor Reg 5, def of unique identifying information Reg 5, def of disclosure year Disclosure of offeror details for sale offers Reg 6 Reg 12 Offers by listed issuers of products that rank equally or above quoted products (ie, simplified disclosure ) Reg 7, 8, 9, 11, 12 and 17 Reg 20, 22, 23, new regs 42A, 49E to 49G, and 54A (and see changes to Schedules below) Offers of convertible products Reg 12 New reg 49A to We agree with the Ministry's approach to the disclosure requirements for convertibles. A highly prescriptive
49D (and see changes to Schedules below) approach would be too complex and confusing to apply to the range of convertible products that may be offered. However, some refinements are necessary for the proposed approach to be workable. Noted below are some general comments in this regard. We have also noted comments or concerns in relation to specific provisions. - The NZBA members are particularly concerned that the provisions relating to convertibles can be used in relation to offers of regulatory capital products. Based on the proposed amendments to Schedule 9 of the, it appears that the Ministry intends for banks to prepare a LDD under Schedule 9 of the for these products. However, proposed 49A provides that proposed s 49B to 49D apply to all offers referred to in section 44 (that is, including Act Schedule 1 offers). Proposed 49B would then require a bank issuing a convertible debt security to use a debt PDS rather than a LDD. This is not the correct outcome. Accordingly, the proposed s should be amended to make it clear how they apply to convertible debt securities issued by banks, either by referring to LDDs in these provisions or including corresponding provisions in the LDD provisions in Schedule 8 of the. However this is achieved, it is important that the outcomes provided by proposed s 49A to 49D are also achieved for bank issuers using a LDD. In particular, the proposed s should: - make it clear that a bank issuing a convertible debt security must comply with the LDD and register entry requirements in Schedule 9 of the (consistent with proposed 49B(1)(a) and (2)(a)); - relieve the issuer of the new product (ie the equity security) from the obligation to prepare an equity PDS (consistent with proposed 49B(4)); and - allow bank issuers to include additional information in the same was as non-bank issuers will be able to under proposed 49D. - As convertibles issued by banks for regulatory capital purposes tend to be quite complex instruments, we are concerned that the disclosure framework clearly allows bank issuers to disclose all relevant information to enable investors to make informed investment decisions. For example, background information on loss absorbing features and bank regulatory capital requirements will be highly relevant to an investor in this type of product. That is, where the convertibles issued by a bank will qualify as regulatory capital, those instruments must include loss absorbing features. These features are complex and give rise to specific risks. Being able to include some background information on these matters and information about the issuers' historic regulatory capital positions can help prospective investors understand the products better. In addition, it would be helpful to be able include information required by other regulatory regimes. Where New Zealand banks have issued convertibles for regulatory capital purposes recently, the convertibles convert into equity securities of the parent entity. That parent is listed on ASX and the parent entity must lodge a cleansing notice with ASX, accompanied by a copy of the offer document. This version of the offer document must include a few short statements which would not ordinarily be included in a PDS or LDD. Those statements are consents to being named in the offer document and a short description of the impact of the offer.
New reg 49C Regulation 49D (or a corresponding provision relating to LDD offers) and existing 34(1)(b)(i) will go some way to assist with this. However, there are limitations with this approach: - 49D will only allow information that would be included in an equity PDS and which relates to either the products or the issuer of the new product (but only if the issuer of the new product is different to the issuer of the convertible); - to the extent that financial information is included in relation to the issuer of the new product, it must be compliant with NZ GAAP. However, in relation to bank regulatory capital instruments, the issuer of the new product will often be an Australian corporation, having financial statements that comply with Australian financial standards; - if additional information cannot be included under 49D, it can only be included if it satisfies existing 34(1), which will likely result in important information being put at the back of the LDD; and - regardless of the basis on which the additional information is included, it will almost certainly put real pressure on the length limits. Accordingly, the following matters should be addressed in the : - where, for example, a debt convertible converts into an equity security and the issuer of both products is the same, the issuer should be permitted to include equity-type disclosures about itself in the PDS or LDD. If a debt instrument converts, investors will have an equity exposure to the issuer, so this information will be relevant; - allow cleansing notice statements to be included in a PDS or LDD; - allow non-nz GAAP financial information to be included in a PDS or LDD in certain circumstances, for example, where the issuer of the new product is the parent entity of a New Zealand registered bank; - allow increased length limits for convertibles. For example, where a debt security converts into an equity security, the length limits for an equity PDS should apply. - When completing the register entry for a convertible, will the Disclose register include fields that allow details about the new product to be clearly entered? For example, where there is a different issuer of the new product, will there be an option to include a second issuer in a way that clearly identifies the roles of each issuer? Convertibles that have been issued recently by New Zealand banks for regulatory capital purposes convert into equity securities issued by the bank's parent company. In order for the convertibles to qualify as regulatory capital for both the New Zealand bank and its parent entity (on a group basis), the trigger events for conversion relate to both the New Zealand bank and the parent entity. This is not contemplated by the introductory words of proposed 49C. The following amendments should be made to address this: "If t h e co nvert ib les w ill b e co n vert ed in t o, o r exch anged f o r, n ew p ro d uct s in con n ect ion w it h an even t o r a circum st an ce relat in g t o insolvency, or a financial difficulty, or capital position of t h e issuer o f t h e co n vert ib le o r t h e issuer o f t he n ew p ro d uct, t h e st at em en t un d er regulat ion 20(1)(e) m ust b e in t h e f o llo w in g f o rm :"
New reg 49D In ad d it io n, t h e seco n d p aragrap h o f t h e p rescrib ed st at em en t ref ers t o co n vert ib les b ein g co m p lex in st rum en t s an d "are not suit ab le f o r m an y invest o rs". Th e co m p arab le st at em en t set o ut in t h e Securit ies Act (Ban ks' Regulat o ry Cap it al) Exem p t io n No t ice 2014 st at es t h at t h e co n vert ib le in st rum en t s are co m p lex in st rum en t s an d t h at t h ey " might not be suit ab le f o r m an y in vest o rs". We are n o t aw are of an y reason w h y t h e risk p ro f ile o f t h ese in st rum en t s w o uld h ave ch anged sin ce t h at Exem p t io n No t ice w as issued in March 2014. Acco rd in gly, w h ere t h e issuer o f t h e con vert ib le is a regist ered b an k, t h e lan guage in t h e p rescrib ed st at em en t sh o uld b e co n sist en t w it h t h e language in t h e Exem p t ion No t ice an d sho uld b e am en d ed as f o llo w s: "Th is in vest m en t is riskier t h an a b an k d ep o sit.* Th ese [name of convertibles] are co m p lex f in an cial p ro d uct s t h at are n o t m igh t no t b e suit ab le f o r m an y invest o rs. If yo u d o no t f ully un d erst an d h ow t h ey w o rk o r t h e risks asso ciat ed w it h t h em, yo u sh ould no t in vest in t h em. Yo u can seek ad vice f ro m a f inan cial ad viser t o h elp you m ake an invest m en t d ecisio n." This should be amended to clarify that: - information included under this clause is "permitted information" for the purposes of 29(1)(c) of the, so can be included in the KIS; and - 34(1)(b)(ii) does not limit the inclusion of additional information pursuant to proposed 49D (the reg 49D information relating to the new product (and the issuer of the new product) should have the same prominence as the disclosure information that is required to be included in relation to the convertible (and the issuer of the convertible). Changes to confirmation notice provisions Reg 14 New regs 52 to 52B Defined benefit schemes Reg 15 and 18(3) Regs 53 and 56 Fund updates for multi-funds investment options Reg 18 to 20 Regs 56 to 58A
Allowing use of fund updates to supplement PDS Reg 21, 35(4), New reg 61A and (5), (25) new clause 8A of Sch 4 Ongoing client reporting for derivatives Reg 22 New reg 71A to 71C Register audits Reg 23 Reg 109 Circumstances in which independent custodian requirements do not apply Reg 24 New reg 237A Derivatives investor money and property obligations Regs 25 to 29 Regs 242, 244 to 244B and 246 Mutual recognition pre-offer advertising Reg 30 Reg 264 Notices given by the FMA Reg 32 New regs 280A and 280B Debt securities Schedule 2 Reg 33 Sch 2: new cl 1(4) Sch 2: cls 6, 9, 11, 15, 30, 48 Sch 2: cl 23 Sch 2: cls 37, 39
Sch 2: new Part 1A, cls 63, 64, 65 Sch 2: cl 67 Equity securities Schedule 3 Reg 34 Sch 3: cls 5, 8, 10, 32 Sch 3: cls 35 and 39 Sch 3: new Part 1A, cl 52, 53 Sch 3: cl 52 Sch 3: cl 53 Sch 3: cl 55 Managed funds Schedule 4 Reg 35 Sch 4: New cl 8A, cl 12, 63 Sch 4: New cl 8B Sch 4: cl 51 Sch 4: New cl 8C, cl 53A Sch 4: cl 54 Sch 4: cl 55 Sch 4: cl 55 Sch 4: cl 58, 59 Sch 4: cl 62 Sch 4: New cl 8A, cl 12, 63
Sch 4: New cl 8B Sch 4: cl 51 Sch 4: New cl 8C, cl 53A Other managed investment schemes Schedule 5 Reg 36 Sch 5: cl 4, 7, 8, 24 Limited disclosure requirements - Schedule 8 Reg 38 Sch 8 Please see the first comment in relation to new s 49B and 49D above. Sch 8: cl 21 Sch 8: cl 23, 29, 32 Sch 8: cl 26 and 31 Sch 8: cl 40A We support the change to clause 23(2) to ensure that, where securities are offered under a LDD, the LDD is not required for secondary sales of those securities. We support the inclusion of proposed 40A to ensure that a LDD can be supplemented or replaced. Bank and Crown LDD - schedule 9 Reg 39 Sch 9 There are a number of places in the existing provisions of Schedule 9 that the current disclosure requirements should be amended to clearly allow for the most effective disclosure to be made. These are noted below: Clause 5: Regulatory capital instruments that qualify as "Additional Tier 1" capital must be perpetual and have discretionary interest payments. Accordingly, statements about "promises to pay you interest and repay money at the end of the term" are not correct. Clauses 8 and 19: - The "description of the term" should clearly allow descriptions for perpetual instruments and write off features of regulatory capital instruments (clauses 8(b) and 19(2)(c)) - Regulatory capital instruments must include certain terms relating to interest payments. For example, "Tier 2" instruments must include rights to suspend (but not cancel) interest payments, whereas interest payments on "Additional Tier 1" instruments must be discretionary and are non-cumulative (although a dividend stopper will apply for so long as interest is not paid). All of these details should clearly be able to be disclosed (clauses 8(e) and (g) and 19(2)(a)). Clause 10(2)(a) and (c): The prescribed statements in these paragraphs refer to selling the products "before the end of their term". As discussed in relation to clause 5, this language is not appropriate in relation to perpetual
Sch 9: cl 1 instruments. Clause 13(1): The first paragraph of the prescribed statement in this clause again refers to the issuer's "commitments to repay you or pay you interest". These statements are not appropriate for "Additional Tier 1" capital instruments, which must be perpetual and have discretionary interest payments. Clause 14(3)(d): As registered banks are required to hold and publish issuer credit ratings, it may be confusing if the LDD cannot mention those ratings at all if a product rating is obtained. It would be more helpful to investors if both ratings could be included and the reasons for the differences explained. It may also assist investors to understand the significance of some of the features of the relevant product. Clauses 29-32: The risks that are required to be disclosed are quite specific and limited. There are risks associated with both the complexities of the instruments and loss absorbency that should be required to be disclosed by these provisions. As noted above in relation to new 49C, convertibles that have been issued recently by New Zealand banks for regulatory capital purposes convert into equity securities issued by the bank's parent company. In order for the convertibles to qualify as regulatory capital for both the New Zealand bank and its parent entity (on a group basis), the trigger events for conversion relate to both the New Zealand bank and the parent entity. This is not contemplated by the definition of "bank hybrid products". The following amendments should be made to address this: "bank hybrid products means debt securities issued by a registered bank that will be converted, or exchanged for, another financial product in connection with an event or a circumstance relating to the insolvency, or a financial difficulty, or capital position of the registered bank or the issuer of the new product"
Sch 9, new cl 5 Sch 9, new cl 13(5) Proposed clause 5(2)(b) will require the LDD to disclose the name of the issuer of the new products. It is often a term of bank regulatory capital instruments that the issuer of the equity securities on conversion may be substituted for a non-specified non-operating holding company ("NOHC"). This allows for the parent entity to restructure its business and is an important contractual right to have where the convertible instrument may have a longer term or be perpetual. However, it is important that, if a NOHC is substituted for the initial issuer of the equity securities, the issue of the equity securities in the NOHC on conversion does not result in a new regulated offer that would require new disclosure. The Securities Act (Banks' Regulatory Capital) Exemption Notice 2014 specifically allowed for the equity securities issued on conversion to be issued by a NOHC and the same outcome should be provided for under the LDD regime. Th e w arn in g st at em en t in sub clause (3) st at es t h at t h e co nvert ib le in st rum en t s m ay co n vert if t h e issuer "exp er ien ces f in an cial d if f icult y". Th e com p arab le st at em en t set o ut in t h e Securit ies Act (Ban ks' Regulat o ry Cap it al) Exem p t io n No t ice 2014 st at es t h at t h e co n vert ib le in st rum en t s m ay co nvert if t h e issuer "exp erien ces severe f in an cial d if f icult y". We are n o t aw are o f an y ch anges t o t h e req uirem en t s f o r regulat o ry cap it al sin ce t h at Exem p t io n No t ice w as issued in March 2014 w h ich w o uld req uire t h is ch an ge t o t h e w arn ing st at em en t. In ad d it io n, t h e w arn in g st at em en t d o es n o t con t em p lat e t h e t rigger even t s f o r co nversio n relat in g t o b o t h t h e New Zealan d b an k an d t h e p aren t en t it y. Acco rd in gly, t h e language in t h e w arn in g st at em en t sho uld b e am en ded as f ollo w s: Warning Th ese [name of debt securities] carry sim ilar risks t o sh ares b ut d o n o t h ave t h e sam e o p p o rt un it y f o r grow t h as sh ares. If [names of issuers] exp erien ce[s] severe f in an cial d if f icult y, [name of debt securities] can b e co nvert ed in t o, o r exch an ged f o r, [name of new products], w h ich m ay b e w o rt h less t h an yo ur invest m en t [or even written off completely]. Th is m ean s you co uld lo se all of your in vest m en t. As d iscussed ab o ve in relat io n t o n ew clause 5(3) o f Sch ed ule 9 ref erred t o ab o ve, t h e p rescr ib ed st at em en t in t h is sub clause sim p ly ref ers t o "f in an cial d if f icult y", no t " severe f in an cial d if f icult y" an d d o es n o t con t em p lat e t h e t rigger even t s f o r co nversio n relat ing t o b o t h t h e New Zealand b an k an d t h e p aren t en t it y. In ad d it io n, t h e last sen t en ce o f t h is st at em en t w ill n o t b e co rrect w h ere t h e co nvert ib les are b ein g issued t o q ualif y as " Additional Tier 1" capital. In that case, the convertibles are required to be perpetual and interest payments must be discretionary. Acco rd in gly, t h e language in t h e w arn ing st at em en t sh o uld b e am en d ed as f o llo w s: If [names of issuers] exp erien ce[s] severe f in an cial d if f icult y, t h e [name of debt securities] m ay b e
Sch 9, new cl 24(6) Sch 9, new cl 30(4)(b) convert ed t o, o r exch an ged f o r, [name of new products] o r w rit t en o f f. Yo u w ill n o t h ave any ch o ice as t o w h et h er a con version o r w rit e o f f o ccurs, an d yo u m ay no t h ave a chan ce t o sell yo ur [name of debt securities] b ef o re t h e con versio n o r w rit e o f f. Th e v alue of t h e [new products] t h at yo u receive if t h is o ccurs is likely t o b e less t h an t h e am oun t yo u in vest in t h e [name of debt securities]. If co nversio n o r exch ange is req u ired b ut is n o t p o ssib le, t h e [name of debt securities] w ill b e im m ed iat ely w rit t en o f f in p art o r in w h ole an d yo u w ill lo se so m e o r all of yo ur invest m en t. [In t erest m ay n o t alw ays b e p aid o n [name of debt securities] an d m issed p aym en t s w ill n o t accum ulat e.]* * Delet e if n o t co n sist en t w it h t h e t erm s o f t h e co n vert ib les. In ad d it io n, clause 13 sh ould allow t h e LDD t o in clud e a b rief sum m ary o f t h e risks regard in g lo ss ab so rb en cy of regulat o ry cap it al in st rum en t s, in clud ing con versio n, w rit e -o f f an d risks relat in g t o t h e issuer o f t h e eq uit y securit y. Convertibles that have been issued recently by New Zealand banks for regulatory capital purposes convert into equity securities issued by the bank's parent company. In those cases, the primary quotation of those equity securities has been on the ASX. The ASX is not a "licensed market" for the purposes of the Act, so accordingly, the new products will not be "quoted" for the purposes of proposed clause 24(6). This issue has been addressed in proposed new clause 10(5) of Schedule 9 to the. The same approach should be taken in relation to proposed clause 24(6) and 24(6) should be amended as follows: " In the case of convertibles, the following apply: (a) if the new products are of the same class as financial products that are quoted on a market licensed in New Zealand or on another established market at the time of the offer, the LDD must include a statement that those products are already quoted: (b) if the new products are equity securities that are not quoted on a market licensed in New Zealand or on another established market at the time of the offer, the LDD must include a description of the key features of the equity securities (to the extent that those features are not already disclosed in section 3 of the LDD (terms of the offer) and are not features that apply to ordinary shares in a company generally). Subclause (4)(b)(i) should be amended as follows to reflect the fact that the investor does not pay for the equity securities as such:
"... the investor is able to sell his or her equity securities at a higher price than the investor paid for them the [name of convertible]" Subclause (4)(b)(iii) should be amended as follows to make it clear that this paragraph is referring to the issuer of the equity securities: "if the issuer of the equity securities runs into financial difficulties..." DIMS - schedule 21 Reg 40 Sch 21: cl 27 Sch 21: cl 37 Exposure draft Reference Reg 4 Reg 3 Reg 5 Reg 11 Exposure draft Reference Reg 4 Reg 13 Reg 4 Reg 14 FA Custodians Regulation FA Exemption Regulation Section two: feedback on the alternative PDS concept Question Do you think the alternative structure would be useful or beneficial to fund providers? What benefits (if any) does it have over the usual managed fund PDS structure?
In what circumstances would you envisage the alternative structure being used? How likely are you to use the alternative structure? Are there any improvements you would suggest to its design? Section three: feedback on policy issues Question Should there be ongoing disclosure requirements for: unquoted mandatory convertible products? other delisted issuers? Are there significant benefits in extending the same class exclusion in Schedule 1 to cover options by way of issue? Or would this result in less useful information being available to investors? Are there significant benefits to unlisted issuers in removing elements of the PDS disclosure for offers to existing product holders? Should the requirement to include all other material information on the register entry be removed to the extent that the information has already been disclosed in annual reports and other such documents? Are there practical problems with using the usual PDS disclosure for options by way of issue that the s should address? Other Comments We agree with the Ministry's conclusion in the "Supplementary Financial Markets Conduct : Commentary and request for submissions" that the minimal benefit to holders of requiring continuous disclosure for delisted issuers is outweighed by the cost to the issuer of complying with those obligations.